Week 6: Retail Location and Market Competition. Retail Sales Data: Surveys of sales establishments = $ by SIC Surveys of consumers = $ by product or line of MerchandiseCenters exhibit the same patterns as do individual stores in classical theory: Many smaller centers, fewer larger ones. Smaller, more numerous shopping centers have more frequent and shorter shopping trips. Larger, more sparsely located centers hClassical Retail Market Areas when retailers compete over only price and consumers shop where the full price (including travelHow well does this classic theory explain Shopping Center success (see: Eppli, Shilling, JRER, 1996)? Sales/sqft across 40+ RComplimentary, Comparative, and Competitive Shopping Complimentary – Comparison Shopping SynergyStore Mix and Shopping CentersAverage Shopping Center Lease terms by store category 1. Anchor 2.Access 3. Apparel Unixex 4. Children 5. Women specialty 6. WRetail Rent: Percentage plus Base Explanation for Percentage RentCenters, “Main Streets”, BIDs, Traditional Business DistrictsBoston Area Regional Center/Mall characteristicsEstimated Utility ParametersPredicted Shopping Center PatronageHow will the Retail system respond to higher Gasoline Prices?MIT OpenCourseWare http://ocw.mit.edu 11.433J / 15.021J Real Estate EconomicsFall 2008 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.MIT Center for Real EstateWeek 6: Retail Location and Market Competition. • Retail Real Estate must understand Retailing (a Business) to correctly attract tenants.• Patterns in Retail location, travel and shopping behavior. • Classical theory: trip frequency, price competition, entry and the determination of retail density. • Neo-classical theory: retail clusters, inter-store externalities, shopping centers, incentive leases.• Simulating and forecasting shopping center demand.MIT Center for Real EstateRetail Sales Data:Surveys of sales establishments = $ by SICSurveys of consumers = $ by product or line of Merchandise* Except 554, Gasoline Service Stations. ** Except 591, Drug and Proprietary Stores. NA, not available.adapted from DiPasquale and Wheaton (1996)Boston CMSA Retail Census Data, 1987SIC Number of Sales per Establishment Paid % of Personal Income Code Kind of Business Establishments Sales (thousands)(thousands) Employees(thousands)Total Retail Trade 25,419 $32,109,978 $1,263 375,662 37.2%52 Building and Garden Materials 1,020 1,679,530 1,647 11,756 1.9531 Department Stores 168 2,914,184 17,346 NA 3.454 Food Stores 3,075 5,756,751 1,872 66,223 6.7541 Grocery Stores 1,794 5,178,412 2,887 51,992 6.0546 Retail Bakeries 665 223,496 336 9,159 0.355* Automotive Dealers 1,228 7,102,357 5,784 24,978 8.256 Apparel and Accessory Stores 2,585 2,051,969 794 26,684 2.4562,3 Women's Clothing and Specialty Stores 1,076 809,699 753 11,754 0.9566 Shoe Stores 712 321,123 451 4,304 0.457 Furniture and Home-furnishings Stores 1,887 1,555,169 824 13,442 1.858 Eathing and Drinking Places 6,950 3,372,405 485 127,978 3.9591 Drug and Proprietary Stores 900 1,148,159 1,276 12,978 1.359** Miscellaneous 5,515 4,138,376 750 44,669 4.8592 Liquor Stores 834 154,438 185 1,480 0.25944 Jewelry Stores 504 326,084 647 3,719 0.45961 Catalog and Mail-Order Houses 148 558,813 3,776 3,670 0.6MIT Center for Real EstateCenters exhibit the same patterns as do individual stores in classical theory: Many smaller centers, fewer larger ones. Boston Shopping Centers, 1992 (National Research Bureau)Specialized / Neighborhood Community Regional Super RegionalNumber of Centers 144 112 22 10Average GLA (sq. ft.) 50,996 165,226 448,130 1,037,266Average Number of Stores 11 20 69 139Average GLA/Stores 4,540 8,196 6,504 7,494Total Stores 1,584 2,354 1,518 1,390Grand Total: 6,846GLA, gross leasable area.adapted from DiPasquale and Wheaton (1996)MIT Center for Real EstateSmaller, more numerous shopping centers have more frequent and shorter shopping trips.Larger, more sparsely located centers have less frequent and longer shopping tripsTravel behavior for retail shopping, 1991.Averages for midday and P.M. trips GLA, gross leasable area.adapted from DiPasquale and Wheaton (1996)0246810121416Neighborhood Community Specialized/RegionalSuper RegionalTrips/1000 sq. ft.GLADistance between Stops(miles)MIT Center for Real Estate1). Purchase frequency (V). u = units of good purchased annuallyp = price per uniti = storage cost per dollar of purchasek = transport cost per tripV = annual trip (purchase) frequency.Q = quantity purchased per trip2). Average inventory = Q/2Q = u/VMIT Center for Real Estate3). Annual consumption costs (CC):CC = pu + kV +i[pu/2V] 4). Minimizing with respect to V:implies ∂CC/ ∂V = k – ipu/2V2= 0or: V*= [ipu/2k]1/25). How do V*(and Q) vary with i, u, k?MIT Center for Real EstateClassical Retail Market Areas when retailers compete over only price and consumers shop where the full price (including travel cost is lowest).LocationConsumer’s full pricePP0P0P + kTTTDDMIT Center for eal stateR E6). Market areas and imperfect competition. v = frequency of purchase trips (good consumption)f = density of buyers along linemc = wholesale price or marginal cost of goods to retailer. c = fixed cost of retailers (structure…)P = retail price of good.D = distance between stores [even spacing?]T = market area size (one side distance)S = retailer salesMIT Center for Real Estate7). Market areas based on equal purchase costs: P + kT = P0+ k(D-T) impliesT = [P0 – P + kD]/2kS = 2vTf = vf[P0 – P + kD]/k8). Profit maximization (with respect to P given P0):π = [P – mc]S - c∂π/∂ P= S + ∂ S/∂P [P-mc] = 0 implies:P = [P0 + kD + mc]/2MIT Center for Real Estate9). Nash (“A Beautiful Mind”) Equilibrium assumption: P0= P implies:P = kD + mc, T = D/2, S = Dvf[profits higher with less competition, why?]10). Free entry determines store density (1/D) so as to erode profit:π = [P – mc]Dvf – c = 0 implies:P = mc + c/DvfMIT Center for Real Estate11). Solving (9) and (10) simultaneously:D = [c/kvf]1/2, P = mc + [kc/vf]1/2- As f doubles (population) the distance between stores less than halves. Hence sales per store rise. Is the average (clothing) store larger in larger MSAs (NBER paper 9113)?- store selling more frequently purchased items (v) have more dense distributions.- stores with high fixed costs [showroom space] are less densely distributed. - What happens with higher Gas Prices?MIT Center for Real